Via Wolf Street

Coddled investors, not taxpayers, should step up to the plate and fund the “daily cash burn.”

By Wolf Richter for WOLF STREET.

October 1 is the day US airlines that accepted their portion of the $25-billion bailout under the CARES Act can start involuntary layoffs of their employees. They’ve been shedding large numbers of employees since March but through voluntary buyouts, early retirements, and other programs that induced employees to temporarily or permanently leave. Now the airlines are engaged in a desperate lobbying effort to get legislation signed into law that would provide the next $25-billion bailout package. Threats have been flying, so to speak, to motivate Congress to get this done.

American Airlines CEO Doug Parker told CBS News on Sunday that if there isn’t a new bailout program, “there are going to be 100,000 aviation professionals who are out of work, who wouldn’t be otherwise.” This would include the 18,000 employees American Airlines has threatened to lay off.

So airlines have been lobbying hard. “You know, we have everyone putting us in every bill they have,” Parker said. “We just need the bills to be laws. We need laws not bills.”

American Airlines was also the airline that blew, incinerated, wasted, and trashed more than any other airline on share buybacks. Buybacks ceased in the second quarter, but from 2013 through Q1 2020, American Airlines incinerated $13.1 billion in cash on share buybacks. That cash would now come in very handy. 2013 was also the year Mr. Parker became CEO of American Airlines.

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Delta blew, wasted, and incinerated $11.7 billion in cash on share buybacks over the period; Southwest Airlines, $10.9 billion (starting in 2012); and United $8.9 billion. In total, the big four airlines blew, wasted, and incinerated $44.6 billion in cash on share buybacks from 2012 through Q1 2020, and now the airlines want an additional $25 billion bailout, for a total of $50 billion, much of it in forms of grants, from taxpayers (data via YCharts):

OK, the demand recovery has been the crappiest ever.

In terms of the numbers of passengers entering airports in the US, over six months into the Pandemic, the business is still down nearly 70% from last year, according to TSA airport screenings. The interesting thing is how the recovery is not happening, and how the strong seasonal patterns have disappeared.

Normally, the passenger count drops sharply in the weeks before Labor Day from the summer peak in June, July, and early August. But after Labor Day, business travel picks up, and older folks with kids out of school start traveling, and the passenger count rises sharply in September. But none of that is happening this year.

The chart below shows TSA checkpoint screenings per day, as a seven-day moving average through September 27, last year (black) versus this year (red):

The very lucrative business segment has gotten crushed as companies still avoid sending their people anywhere unless they absolutely have to; conferences and large meetings are still mostly shut down; and job applicants are interviewed remotely. And among vacation travelers, older people with no kids in school, who would normally take advantage of the beautiful and less crowded fall months, are avoiding getting on planes for health reasons.

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Over the past seven days, from September 21 through September 27, the passenger count was down each day in a range of -64.4% to -73.0% compared to the same weekday last year, putting the seven-day moving average at -68.4% as of September 27. Part of the year-over-year bump around Labor Day was due to the calendar shift with Labor Day falling on September 7 this year, compared to September 2 last year:

In terms of international travel, flight restrictions and quarantine requirements in the US and other countries make this a tough situation for willing American travelers. And for US airlines, that crucial and lucrative segment is unlikely to bounce back quickly, given the once-again rising infection rates in the US and many other countries.

So what to do with these airlines?

The airline industry invented a new metric during the Pandemic: “daily cash burn.” The purpose is to give investors a feel for the progress in implementing the airlines’ survival strategies. Every airline now cites this metric. The idea is to make this number as small as possible by cutting capacity, shedding employees, and reducing costs wherever possible.

Investors who’ve been coddled over the years through share-buybacks, have helped fund the airlines’ daily cash burn by buying the newly issued bonds and shares. They have done so because they counted on support from taxpayers and the Fed.

Investors should continue to step up to the plate and fund that daily cash burn. But taxpayers – they’re already sitting on billions of dollars in tickets they can’t get refunds for though they can use the “credits” or whatever in the future – shouldn’t be shanghaied into funding airlines. That’s Wall Street’s job.

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And if Wall Street refuses to step up to the plate and one or the other airline runs out of funds to fuel its daily cash burn, well then, that debt needs to be restructured at the expense of investors, and that can be done in bankruptcy court, as Delta, American, and United have already proven and demonstrated in the past.

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